Productivity and Labor Revised

The Labor Department has revised its second quarter report on Productivity and Unit Labor Cost (ULC).  Originally the productivity figure was estimated to have dropped 0.9%.  The revision shows that it fell by 1.8%, twice as much.  Productivity is important because it allows an economy to grow without impacting inflation when it is increasing.

Unfortunately for the second quarter’s report, it was moving in the wrong direction.  Production, up 1.6%, grew more slowly the number of hours worked, which showed a 3.5% increase.  This is the second largest gain in hours worked since the first quarter of 2006.  Since labor tends to be the most costly expense business encounters, seeing productivity decline in this manner will have a negative impact on many companies’ bottom lines. One solution to this calls for a reduction in labor, cutting jobs. But letting people go can be a very taxing exercise, both emotionally and logistically, for a company to go through, so employers may want to see if this change in productivity is temporary or becoming a trend before letting workers go. Thus retail sales figures will be a key metric to monitor. If demand by consumers for output does not keep up with current production, jobs may need to be cut.

This Productivity and Labor Unit Cost report does not have to be a harbinger of bad news just yet, but here at Atlas we liken it to an economic version of a canary in the coal mine.  Let’s hope it keeps singing.